Derivatives.

When trading on the stock exchange, there are many options to protect yourself from price risks; one of the most common options for fixing prices is such an instrument as a derivative.

Derivatives - an agreement that fixes the price of one or more specified goods in transactions on an exchange. Its use allows you to fix the price of an asset at a certain level and avoid losses as a result of its fluctuations.

Derivatives are used when trading assets such as currencies, bonds, stocks, market indices, interest rates and commodities.

Main types of derivatives.

Futures are an obligation to enter into a transaction for a specific group of goods with a set date and price.

Forward contracts are an agreement for the supply and payment of a certain quantity of goods with a fixed price and time of the transaction.

Options - unlike the two previous options, this is the right to make a transaction with a certain type of asset with a fixed expiration date or maturity date.

Swaps are an obligation that provides for the exchange of payments, according to the conditions described in the agreement, and is used both in exchange transactions and in the banking sector.

Derivatives are usually used to reduce price risks by choosing the most appropriate instrument depending on the situation.

An example of such a transaction would be the option of hedging a transaction with securities.

A foreign investor, buying shares of an American company for US dollars, tries to protect himself from currency risk and at the same time enters into a contract to purchase euro currency at a strictly fixed rate.

Now, when selling shares back, he is insured against financial losses even if the euro exchange rate increases.

This example clearly shows how these types of derivatives are used in relation to reducing currency risk.

Similarly, such contracts can be used in transactions with energy resources or other goods. Thanks to them, the company has the opportunity to determine in advance the possible amount of profit and protect itself from possible fluctuations in prices, rates or Forex risks .